TY - JOUR
T1 - The Interaction of Implicit and Explicit Contracts in Repeated Agency
AU - Pearce, David G.
AU - Stacchetti, Ennio
N1 - Funding Information:
* To whom correspondence should be addressed. E-mail: ennio@umich.edu. We are grateful for the ®nancial support of the National Science Foundation and the Center for Economic Policy Research at Stanford University. Our thanks go to the anonymous referees for their helpful comments.
PY - 1998/4
Y1 - 1998/4
N2 - In a repeated principal-agent model in which the agent's actions are observable to the principal but not verifiable in court, the agent's incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior. Explicit short-term contracts are designed to enhance the effectiveness of the infinite-horizon implicit contract between principal and agent. In a constrained-efficient equilibrium, bonuses smooth the consumption path of the risk-averse agent by moving in the opposite direction from salaries, total consumption, and expected discounted utility for the rest of the game.Journal of Economic LiteratureClassification Numbers: C7, C73, D8.
AB - In a repeated principal-agent model in which the agent's actions are observable to the principal but not verifiable in court, the agent's incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior. Explicit short-term contracts are designed to enhance the effectiveness of the infinite-horizon implicit contract between principal and agent. In a constrained-efficient equilibrium, bonuses smooth the consumption path of the risk-averse agent by moving in the opposite direction from salaries, total consumption, and expected discounted utility for the rest of the game.Journal of Economic LiteratureClassification Numbers: C7, C73, D8.
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U2 - 10.1006/game.1997.0607
DO - 10.1006/game.1997.0607
M3 - Article
AN - SCOPUS:0003815916
SN - 0899-8256
VL - 23
SP - 75
EP - 96
JO - Games and Economic Behavior
JF - Games and Economic Behavior
IS - 1
ER -